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January 2, 2019 US grants limited exemptions from Section 301 duties and announces annual special review of Section 301; continued uncertainty ahead Executive summaryOn 21 December 2018, the Office of the United States (US) Trade Representative (USTR) announced its first round of decisions for exemption requests on certain imported Chinese-origin goods from Section 301 of the Trade Act of 1974 (Section 301) punitive tariffs.1 The product exclusions were subsequently published in a Federal Register Notice (FRN) on 28 December 2018 and cover approximately 1,000 separate requests by US importers covering a disparate range of products (details listed further below) that the USTR has determined meet specified criteria for exclusion. As of 30 December 2018, the USTR has approved 9%, denied 11.7% and continues to review 79% of the more than 10,800 submissions. Notably, the exclusions only span 21 unique tariff codes.2 Also on 28 December, the USTR announced its annual “special review” to identify countries that deny adequate and effective protection of intellectual property (IP) rights or deny fair and equitable market access to US persons who rely on IP protection under Section 301.3 The review assists the USTR with determining countries for which the USTR can implement an investigation pursuant to Section 301 to determine whether certain trade measures are appropriate to address a country’s restrictions on trade and IP rights. The most recent investigation under Section 301 occurred in 2017 and 2018 and ultimately resulted in the USTR implementing the punitive tariffs now in place on approximately $250 billion of imports from China. Detailed discussionSection 301 punitive duties backgroundOn 22 March 2018, President Trump executed a Presidential Memorandum directing the Administration to take a full range of action responding to China’s acts, policies and practices involving unfair and harmful acquisition of US technology. That action was based on a report released the same day by the USTR providing findings of an investigation conducted under Section 301 of the Trade Act of 1974. The investigation concluded that China’s forced or coerced transfers of US technology burden or restrict US commerce, and an interagency team of subject matter experts and economists have estimated resultant harm to the US economy. The President directed the USTR to propose 25% additional duties on imports of Chinese products “commensurate with the harm caused the US economy.” The USTR subsequently proposed, and President Trump ordered, punitive duties of 25% to be imposed and collected on 818 tariff lines covering US$34 billion4 worth of imports from China per year as of 6 July 2018 (US List 1). Since that time, the US has imposed a 25% tariff on an additional $16 billion of imports (US List 2) and a 10% tariff on $200 billion of imports (US List 3). The US had said it would increase the 10% tariff to 25%, but recently announced it would delay that action until 2 March 2019 pending new negotiations with China.5 Following imposition of the punitive duties last year, the USTR subsequently announced a product exclusion process for items covered by US Lists 1 and 2. The submission process for List 1 closed on 9 October 2018, with nearly 10,800 requests publicly posted. The deadline for importers seeking an exclusion for items covered under US List 2 recently passed on 18 December 2018. Over 1,640 requests have been publicly posted for consideration, totaling more than 12,440 separate requests for the $50 billion of goods covered under the first two lists. At this time, the USTR has not provided any further guidance or instruction on exclusion request procedures for items covered under US List 3. Exclusions grantedThe USTR’s recent 28 December 2018 FRN reaffirms that product exclusion decisions will be made based on the criteria stated in the notices establishing the exclusion process. Specifically, the criteria requires applicants to provide the following detailed information for consideration of a determination to grant an exclusion: (1) availability of the product outside of China; (2) harm to US interests due to additional tariffs; (3) significance of the product to Chinese industrial policy; and (4) whether an exclusion would undermine the objective of the Section 301 investigation. The FRN also explains that exclusion decisions reflect advice from the Interagency Section 301 Committee as well as the USTR’s consideration of public comments submitted during the exclusion request period. The initial product exclusions granted by the USTR are set forth in the Annex of the agency’s 28 December 2018 FRN and take two different forms. Seven product exclusions address 918 separate requests and consist of existing 10-digit subheadings that fall within one of the 8-digit subheadings covered by US List 1 (three 10-digit subheadings are found within the same 8-digit heading). The remaining 24 specific product exclusions address 66 separate requests and are limited to specially prepared product descriptions that fall within 10-digit subheadings. Importantly, the latter exclusions only apply to the product descriptions listed in the 28 December 2018 FRN Annex — not the entire 10-digit subheading. Product exclusions apply to any product that meets the description contained in the FRN Annex which are entered for consumption or withdrawn from warehouse on or after 12:01 EST on 6 July 2018 and are not limited to the particular requestor. Exclusions apply retroactively to when the tariffs were implemented, 6 July 2018, and extend for one year after publication of the exclusion notice. US Customs and Border Protection is expected to publish specific guidelines for importers on procedures to seek refunds of punitive duties and for filing procedures on exemption-granted items. Products excluded based on existing Harmonized Tariff Schedule of the US (HTSUS) 10-digit descriptions:(i) 8412.21.0075: certain types of linear acting (cylinders) (ii) 8418.69.0120: self-contained drinking water coolers (iii) 8480.71.8045: certain kinds of injection type molds for rubber or plastics (iv) 8482.10.5044: certain kinds of single row bearings with an outside diameter of 9 mm and over but not over 30 mm (v) 8482.10.5048: certain kinds of single row bearings with an outside diameter of over 30 mm but not over 52 mm (vi) 8482.10.5052: certain kinds of single row bearings with an outside diameter of over 52 mm but not over 100 mm (vii) 8525.60.1010: Citizens Band (CB) transceivers Products excluded based on specially prepared product descriptions:(viii) 8407.21.0080: Spark-ignition engines for marine propulsion, outboard, each rated at not less than 29.83 kW but not more than 44.74 kW (described in statistical reporting number) (ix) 8412.21.0030: Welded hydraulic linear acting (cylinders) engines and motors, each with piston bore of 12.7 mm or more but not over 34.6 mm, with stroke not over 11.43 m, overall length not over 15.24 m and rod diameter not over 1.219 m (x) 8419.90.2000: Stretchers of stainless steel, designed to move rollers to adjust tension of paper fabric to be dried, each with a pivoting arm with an actuator, linear rail movement with an actuator, and front and back units with mounting holes for tube roll bearing housings (xi) 8420.10.9080: Roller machines with dies for embossing paper, manually powered (described in statistical reporting number (xii) 8421.19.0000: Salad spinners of plastics, with capacity of at least 2.4 liters but not more than 3.8 liters (xiii) 8421.21.0000: Nonelectric water filtration apparatus consisting of three cylinder-shaped filter cartridges, each measuring 6.35 cm by 26.67 cm, having water storage tank and plastic tubing measuring 0.63 cm or more but not over 0.95 cm, presented with installation kit (xiv) 8425.39.0100: Winches, each having a winch frame with a corrosion resistant coating and stainless steel mandrel with nylon bushings, operated manually by a worm gear mechanism (xv) 8428.32.0000: Elevators, comprising L-shaped steel buckets bolted to a steel chain, with guide rollers and a drive system (xvi) 8428.33.0000:
(xvii) 8439.99.1000:
(xviii) 8466.92.5010:
(xix) 8481.90.9040: Angle cock handle assemblies, of iron and steel, each measuring 11.43 cm by 21.59 cm by 5.08 cm and weighing 0.748 kg (xx) 9022.14.0000: Radiation therapy systems, each encased by steel-based structural shell with gantry cover comprising three pairs of plastics-based panels (xxi) 9032.10.0030: Thermostats designed for air conditioning or heating systems, not designed to connect to the internet, the foregoing designed for wall mounting Annual Special 301 Review backgroundThe annual Special 301 Review announced on 28 December 2018 requires the USTR, pursuant to Section 301 of the Trade Act of 1974, to identify countries that deny adequate and effective IP protections, or fair and equitable market access to US persons who rely on IP protection. The review procedures may result in the USTR designating a country as a Priority Foreign Country (PFC) if the country engages in the most onerous and egregious acts, policies, and procedures that deny adequate IP protection, has the greatest adverse impact on US products, and is not entering into good faith bilateral or multilateral negotiations to protect IP rights. PFCs may then be placed on an agency created “Priority Watch List” or “Watch List,” with the former determined to have serious IP rights deficiencies that will be closely monitored and potentially subject to additional actions including imposition of punitive duties. To reach these determinations, the USTR’s Special 301 Subcommittee will rely on information from multiple sources, including written comments and public testimony regarding IP issues in foreign countries. The USTR requested that interested parties provide written comments to identify “countries whose acts, policies, or practices deny adequate and effective protection for intellectual property rights or deny fair and equitable market access to U.S. persons who rely on intellectual property protection” by 7 February 2019 and those wishing to testify file notice of intent to appear at the public hearing by 21 February 2019. The public hearing will be held on 27 February 2019. The 2019 Special 301 Report will be published on or around 26 April 2019 per the USTR statement. What to expect next?Trade negotiations between the US and China remain complex and uncertain, although both nations have recently granted temporary concessions to avoid immediate escalation of tensions while continuing negotiations on US demands for trade reform of China’s practices as defined in the Section 301 report. On 1 December 2018, President Trump announced that the US will temporarily leave the additional 10% ad valorem punitive tariffs in place on China-origin products beyond 1 January 2019, for an additional 90 days, officially set as 2 March, instead of increasing the rate to 25% as originally planned. In response, Chinese leadership submitted a plan that would lower tariffs on imported US-origin automobiles to 15%, beginning in March so as to be commensurate with the US 90-day deferral, which would reflect the rate assessed on US produced vehicles to match that assessed on all other countries. It also committed to purchasing agricultural, energy, industrial and other products from the US. The USTR will continue to review product exclusion requests for US Lists 1 and 2. Presently, 7,670 requests remain under “Stage 2” review with the USTR to determine whether the exclusion request should be granted, based on the substantive criteria set out in the Product Exclusion Notice. For those requests determined by the USTR to meet the criteria, the next stage prior to granting of exclusion is submission of the conclusion to US Customs and Border Protection (CBP) in which the request is further reviewed to determine whether an exclusion would be administrable by CBP should the exclusion be granted. There are currently 886 requests at “Stage 3” and neither the USTR nor CBP have provided any details regarding processing times or criteria for determining “administrability.” While additional exclusions are expected to be granted, the procedure is time-intensive and will be based upon both the USTR and CBP’s available resources to process the requests. Actions for businessesAny company involved in US-China trade is encouraged to identify the potential impact of additional duties and identify which products they import could receive, or may already have received an exclusion. Companies who have paid punitive duties on imports now excluded from the tariffs since implementation in July 2018 should consider developing a comprehensive process for filing for a refund from Customs, upon publication and implementation of approved procedures. Close monitoring of the exclusion process is warranted, as companies will want to immediately identify products exempt from the duties on the initial list of products announced, as well as any subsequent approvals for products covered under Lists 1 and 2. Additionally, for companies impacted by products included in List 3, monitoring of the USTR’s procedures for exclusion requests, which have yet to be announced, is recommended as submission timelines have been short and based on the denials and approvals to date, a well-articulated and substantiated argument meeting the exemption criteria will be necessary for success. For companies that have experienced IP issues in foreign countries, consideration should be given to participating in the Special 301 review process as published by the USTR. With comments due in early February, preparation of comments should be undertaken now and should provide the requisite information for the USTR to identify the effect of a particular country’s acts, policies, and practices. Immediate actions for such companies could include:
Endnotes 1. USTR Notice of Product Exclusions. See https://ustr.gov/sites/default/files/enforcement/301Investigations/12.21.18_Notice_of_Product_Exclusions.pdf. 2. 83 Federal Register 67463-67468. See https://www.govinfo.gov/content/pkg/FR-2018-12-28/pdf/2018-28277.pdf. 3. https://www.govinfo.gov/content/pkg/FR-2018-12-28/pdf/2018-28319.pdf. 4. Currency references in this Alert are to US$. 5. See EY Global Tax Alert, US announces temporary pause on planned increase of List 3 tariffs on China origin goods; duties remain in force and key issues remain unresolved, dated 3 December 2018. For additional information with respect to this Alert, please contact the following: Ernst & Young LLP, Chicago
Ernst & Young LLP, Dallas
Ernst & Young LLP, Houston
Ernst & Young LLP, Irvine
Ernst & Young LLP, New York
Ernst & Young LLP, Portland
Ernst & Young LLP, San Diego
Ernst & Young LLP, San Jose
Ernst & Young LLP, Seattle
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